HARRSIBURG – The city’s 2011 audit filed this week was
overdue, but finished just in time to submit project financing applications for
nearly $62 million for sinkhole repairs and a wastewater
treatment plant upgrade.

The completion of the 200-page document
also updates the financial reporting by the city government, which
had missed audits starting in 2009.

Those are good things.

But the 2011
audit also details problems with the city’s bookkeeping and federal
grant reporting compliance that year. Some of those issues were
identified by the 2010 audit as well, including:

• Exceeded debt limit by $109.1 million, up from from $107.6 million the year prior.

•
Operating deficit was $11 million in 2011. City ended 2012 with $8.5
million shortfall, according to the city's 2012 annual fiscal report.
Deficit is on track to be at least $5.5
million for 2013, which assumes $2 million in union concessions that
take effect within the next month or so and doesn't account for $5.7 million
in bond payments skipped so far this year.

• No
publicly-available list of residential units where lead-based paint remediation work had been performed. City says it’s since established one. PennLive has filed a
right-to-know request for the list.

• Had to give back more
than $180,000 in Energy Efficiency and Conservation Block Grant funds
to the federal Department of Energy because the department found the
city hadn't spent the money awarded starting in August 2009 as required.
DOE agreed last fall to let the city use the rest of the money after it
submitted an amended plan - for what, the audit does not make clear, and city officials didn't respond Thursday to requests for more information.

• DCED kept $50,000 of a financial
assistance grant to make up for undocumented expenditures for the city's
Sesquecentennial Celebration Grant contract during July 2007 through
June 2011.

• Failure to comply with federal grant
requirements, risking future funding awards. Grants received totaled
$6.2 million in 2011, down by $1.4 million - or 18 percent - from $7.6
million received in 2010. It is unclear whether noncompliance cost the
city funding, and neither audit Tracey Rash nor audit committee members
immediately responded Thursday to requests seeking clarification. In the
audit report, the city attributed noncompliance issues to turnover.
City also said it has resolved those issues by taking steps such as
establishing calendars and schedules to prevent
missing future reporting deadlines. Some of the details of grant
noncompliance:

o Did not prepare
and/or submit some quarterly and annual federal stimulus funding reports
for Community Development Block Grants and Homelessness Prevention and
Rapid Re-Housing Program, Lead-Based Paint Hazard Control Program and
Public Safety Partnership and Community Policing grants.

o
Didn’t check that grant-funded contracts of $25,000 or more went to
vendors without suspensions on record. As simple as checking federal
database, which city said it would do going forward.

•
Violated securities regulations, prompting an investigation by the SEC.
Ultimately, SEC charged Harrisburg with securities fraud and agreed to a
settlement announced May 6 involving no monetary penalties so long as
the municipality continues to adhere to securities regulations.

•
Instead of being handled exclusively by City Controller Dan Miller as
per municipal policy, payroll bank accounts went through Treasurer John
Campbell and Finance Director Robert Kroboth. That procedure was established after related infighting prompted a lawsuit; meanwhile, payroll accounts were
never reconciled, according to Campbell. He and Kroboth also didn't reconcile other
accounts in a timely – auditors recommend monthly – manner. That
means estimates of the city’s cash balances weren’t always accurate.
City says the hiring of senior financial accountant Bryan McCutcheon
last November at an annual salary of $55,000 should address these
issues. All account reconciliations are up-to-date through April of this year, Campbell said.

• The city still
hasn’t been able to calculate exact spending on the Wild West artifacts,
some of which were auctioned in 2008 and 2009 and others scheduled for
auction in July. The audit concludes officials don’t need to continue
their efforts to figure out how much was paid for them. Rash did not immediately respond Thursday to requests for clarification.

As
with the 2010 audit, forensic audit published in January 2012 and SEC
investigation report released May 6, the 2011 audit also relates
financial reporting violations, missed bond payments – and litigation
and other effects for the city government and its component agencies The
Harrisburg Authority, Harrisburg Parking Authority and Harrisburg
Redevelopment Authority.

Some highlights:

• As of March
2013, Dauphin County has paid $52.97 million and bond insurers $15.2
million – or just over $68 million combined – to cover debt service
payments that neither The Harrisburg Authority, which issued the bonds,
nor the city, which guaranteed the bonds, could pay. The county and bond
insurers also were paid fees to guarantee the bonds, but the audit
doesn't list those payments. Unless the Act 47 plans resolves these
issues, it’s likely that the county and bond insurer will come to
collect and ask for costs and attorneys fees as well.

• Harrisburg
Parking Authority and the Redevelopment Authority have stuck to their
debt repayment schedules. But Moody’s downgraded ratings for bonds sold
by both public entities after the city attempted to file for bankruptcy.

• The Harrisburg
Authority's Water segment had an accumulated deficit of $34.5 million
and its incinerator, $187.4 million, or $221.9
million combined, at the end of 2011. Auditors attributed that to bond
obligations and the authority charging too little, which authority
representatives have blamed previously on Dauphin County officials
blocking them from increasing rates. Looking to Act 47 plan - including sale of the resource recovery facility - to
resolve this issue.

• Last August, the IRS launched an examination into bonds
issued in 2003 by The Harrisburg Authority for resource recovery
facility improvements. That investigation closed without any findings,
according to Authority Board Chairman Bill Cluck.

Until
the city's 2011 audit was complete, The Harrisburg Authority couldn't
finish its application to the Pennsylvania Infrastructure Investment
Fund for a $52.7 million grant-loan package to upgrade the city's
wastewater treatment plant at the behest of the federal Environmental
Protection Agency and state Department of Environmental Protection.

The same was true for the city's request to PennVEST for $900,000 for sinkhole repairs.

The audit was filed late Monday, in plenty of time for PennVEST's 5 p.m. Wednesday application deadline.

PennVEST staff confirmed Thursday that applications from the city and authority were completed on time and are under review.

This story was updated to add comments from City Treasurer John Campbell.

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